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Coalition 'struggling on deficit'

Britain's beleaguered public sector finances showed little sign of improvement in May as economists said the Coalition appeared to be struggling to meet its target for bringing down the deficit.

Borrowing rose to a higher-than-expected £13.3 billion though it edged down by £200 million, or 1.5%, on an underlying basis.

Experts pointed out that this was much narrower than the 11% fall in the deficit for the current financial year pencilled in by the independent Office for Budget Responsibility (OBR).

Samuel Tombs, of consultancy Capital Economics, said the figures "contain tentative signs that the Coalition may be beginning to struggle to bring down the deficit in line with the fiscal plans".

Tax receipts had "continued to grow disappointingly weakly", he added.

"So, while the economic recovery may now be fairly strong, it still appears to be struggling to have much of an impact on the borrowing numbers."

Treasury coffers were partly boosted by surging stamp duty revenues, which were 28% ahead at £1.2 billion. This was primarily driven by higher receipts from land and property transactions rather than share deals to which it also applies.

The £13.3 billion borrowing figure for May was £4.6 billion up on the same month last year.

But this comparison was distorted by the effects of the Bank of England's quantitative easing (QE) asset purchase programme and receipts from taxes under an arrangement with Switzerland. Stripping out these figures resulted in a small fall.

Central government receipts on an underlying basis - excluding the Swiss tax arrangement and QE - were ahead by £1.4 billion.

The Treasury's take from income tax and capital gains tax fell 1.4% on May 2013 to £10.2 billion but corporation tax rose by 17.5% to £1.5 billion.

Underlying public sector debt was £1.2845 trillion, or 76.1% of gross domestic product (GDP), an increase on April when it was 75.7%.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "The public finances were essentially only stable year on year in May after stripping out all distorting effects.

"Following a weakened performance in April, this means that the Chancellor has suffered a disappointing start to fiscal year 2014/15."

Martin Beck, senior economic adviser to the EY Item Club, said: "Even the underlying picture points to the public finances improving at a rate well short of the recovery in the economy.

"It could be that recent reforms to the tax system, including rises in the tax-free personal allowance and cuts in corporation tax, combined with structural shifts in the labour market towards lower paid work, are contributing towards economic growth that is simply less 'tax-rich' than in the past.

"If true, achieving the OBR's borrowing target for the fiscal year as a whole may well prove to be a challenge."

Chris Leslie, shadow chief secretary to the Treasury, said: "Borrowing is now expected to be almost £190 billion more than planned under this Government.

"This is the cost of three damaging years of flatlining and falling living standards we have seen since the election."

A Treasury spokesman said: "Today's public sector net borrowing figures continue to be in line with the budget forecast, which predicts the deficit to have halved by the end of this year.

"But the job is not yet done, which is why we must continue to work through the plan that is building a resilient economy."

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